Which Costs to Cut First?

Updated: May 17

When it comes to saving money, we want to focus on getting the most out of our effort.

This means focusing our energy on the area's where we spend the most money, as this will lead to the greatest savings!

In order to do this we need to have a solid understanding of our finances. We need to understand not just our fixed costs like rent, car insurance, utilities, etc., but also our variable costs like groceries, gasoline, etc.

Use Your Budget To Help Determine Which Spend Categories to Focus On

If you don't keep a budget, go ahead and start now. This will help you get a better idea of your spending habits, and will be a tool to help you hold yourself accountable for your spending.

Without a budget it can be hard to track your spending, and you are more susceptible to overspend. For those that don't know how to create a budget, check out this article.

At the end of the month go back and reconcile your budget to what you actually spent, and examine how you did. You should know by looking at your budget how much you spent on each category versus how much you anticipated spending at the beginning of the month.

An example of what yours may look like is:

Map Your Expenses

If you have a budget, it makes it easy for you to map out your expenses and see where most of your money goes. Just by looking at the example above, we can obviously see that most of our money goes to Rent, followed by Groceries and Utilities.

Focus On The Largest Spend Categories

This is powerful information. Once we know this, we can start to focus our efforts and creativity on saving in these categories!

This strategy is proven to work. In fact, this strategy is widely applied in business. It's a popular consulting tactic to focus on cutting costs in the largest spend categories. Savings in these areas result in dramatic effects to the bottom line because they are such a large portion of total costs!

If you want to read more about this strategy and how it's applied in business, a great example is the book "How to Build A Billion Dollar Company From Scratch" by Harrie E. Figgie Jr. Mr. Figgie Jr. was a businessman who specialized in buying unprofitable manufacturers at advantageous prices, and turning them profitable often through cost cutting and profit maximization alone. He started with a $23M business and through acquisitions grew it to over $1B in value.

Applying This To Your Saving

Now that we now what our biggest expenditures are, we can get creative in thinking about how to cut these down. Maybe your lease is coming up and you decide you don't need to rent out a two-bedroom by yourself, and you downsize to a one-bedroom to save money.

Doing this could dramatically reduce your expenses every month since it's such a large expense, and instantly result in massive savings. This alone would probably be more effective than most other penny-pinching frugality tips and tricks I could teach you.

We can also see that groceries and utilities are the second and third largest spend categories. There are tons of tips to save on food, many outlined here. These are fairly easy to implement, however some like the rebate apps, take some time.

Regarding utilities, generally the main driver of your electric bill is the AC. There are a lot of good resources to lower your AC bill, consider going solar or other ways of keeping your home cool during the hot months.

Work Smarter, Not Harder

Implementing cost saving efforts on your largest spend categories will move the needle the most in terms of your savings. It's a time tested strategy that is just as effective with personal finance as it is in big business.

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